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Some Stocks May Actually Benefit From Slow US Growth


Good fundamental stock pickers may have the best shot at investment success under a scenario of slow GDP growth in the US and developed world.

Fourth, the fast pace of technological change creates its own demand in the consumer space. Human beings are always going to want the next best thing. That is simply human nature. And no amount of economic malaise is going to change that. People are going to continue to do whatever it takes to acquire the latest compelling tech products as they're brought to market. These products are perceived to add value (including status) to people's lives. There's no end in sight to the innovation cycle in consumer products. Therefore, growth opportunities will abound in this space. It's possible that the life cycles of many consumer companies may be shortened, but this will only occur as a result of new companies growing at very fast rates.

What Gives?

If we take as our premise that GDP in the US will grow slower in the next decade or two than it did in the previous three decades, then it seems counter-intuitive that there would be many growth stock investment opportunities. Simple arithmetic suggests that something must give.

This observation leads us to a key insight. If it's true that many companies will grow briskly in the face of slow GDP growth, then the pace of change and disruption in the future must necessarily be extremely high. For example, if companies that make high-tech gadgets are growing fast in the face of low-income growth, then other companies in the economy must be contracting or even disappearing. Here we may distinguish between two types of scenarios that should become commonplace.

One scenario involves old-line companies providing traditional goods and services either contracting or going out of business. Examples: newspapers, fixed-line phones, paper books, physical toys and games replaced by online content, cell phones, e-books and online articles, and computer games. The growth of Google (GOOG), Apple (AAPL) and Nintendo will come largely at the expense of the traditional companies. Therefore pace of change will be high and the amount of growth stock opportunities will be high even though GDP growth will be slow.

The other scenario involves shortened corporate life cycles among growth companies. In the old days, a single consumer product innovation could assure profitability in a company for decades (think of toothpaste, toilet paper, diapers, etc). Today, a single product innovation might assure you a year or two of profitability at best. Thus, a slow GDP growth scenario in a world of rapid technological innovation implies a great deal of cannibalism amongst high-tech companies. This means that many high-growth companies will indeed appear on the scene and provide opportunities for long-side stock pickers. The problem is that many of these same companies will also disappear fairly quickly as new innovators displace them. This will provide opportunities for short sellers.
No positions in stocks mentioned.
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